UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(Mark One) | |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20182019
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to______________________
Commission File Number 0-422
MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey (State of incorporation) | 22-1114430 (IRS employer identification no.) |
1500 Ronson Road,485C Route One South, Iselin, New Jersey 08830
(Address of principal executive offices, including zip code)
(732) 634-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | MSEX | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post files).
Yesþ No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filerþ | Non-accelerated filer¨ |
Smaller reporting company¨ | Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes¨ Noþ
The number of shares outstanding of each of the registrant's classes of common stock, as of July 31, 2018:2019: Common Stock, No Par Value: 16,392,35016,568,090 shares outstanding.
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Operating Revenues | $ | 34,919 | $ | 33,014 | $ | 66,096 | $ | 63,145 | $ | 33,393 | $ | 34,919 | $ | 64,090 | $ | 66,096 | ||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Operations and Maintenance | 16,825 | 16,856 | 34,659 | 32,795 | 16,781 | 16,825 | 32,901 | 34,659 | ||||||||||||||||||||||||
Depreciation | 3,736 | 3,385 | 7,345 | 6,693 | 4,123 | 3,736 | 8,170 | 7,345 | ||||||||||||||||||||||||
Other Taxes | 3,637 | 3,415 | 7,021 | 6,724 | 3,539 | 3,637 | 7,042 | 7,021 | ||||||||||||||||||||||||
Total Operating Expenses | 24,198 | 23,656 | 49,025 | 46,212 | 24,443 | 24,198 | 48,113 | 49,025 | ||||||||||||||||||||||||
Operating Income | 10,721 | 9,358 | 17,071 | 16,933 | 8,950 | 10,721 | 15,977 | 17,071 | ||||||||||||||||||||||||
Other Income (Expense): | ||||||||||||||||||||||||||||||||
Allowance for Funds Used During Construction | 214 | 180 | 381 | 299 | 643 | 214 | 1,158 | 381 | ||||||||||||||||||||||||
Other Income (Expense), net | 571 | 230 | 868 | 436 | (80 | ) | 571 | (138 | ) | 868 | ||||||||||||||||||||||
Total Other Income, net | 785 | 410 | 1,249 | 735 | 563 | 785 | 1,020 | 1,249 | ||||||||||||||||||||||||
Interest Charges | 2,068 | 1,469 | 3,206 | 2,472 | 1,788 | 2,068 | 2,988 | 3,206 | ||||||||||||||||||||||||
Income before Income Taxes | 9,438 | 8,299 | 15,114 | 15,196 | 7,725 | 9,438 | 14,009 | 15,114 | ||||||||||||||||||||||||
Income Taxes | 763 | 2,918 | 1,945 | 5,374 | (421 | ) | 763 | (687 | ) | 1,945 | ||||||||||||||||||||||
Net Income | 8,675 | 5,381 | 13,169 | 9,822 | 8,146 | 8,675 | 14,696 | 13,169 | ||||||||||||||||||||||||
Preferred Stock Dividend Requirements | 36 | 36 | 72 | 72 | 36 | 36 | 72 | 72 | ||||||||||||||||||||||||
Earnings Applicable to Common Stock | $ | 8,639 | $ | 5,345 | $ | 13,097 | $ | 9,750 | $ | 8,110 | $ | 8,639 | $ | 14,624 | $ | 13,097 | ||||||||||||||||
Earnings per share of Common Stock: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.53 | $ | 0.33 | $ | 0.80 | $ | 0.60 | $ | 0.49 | $ | 0.53 | $ | 0.89 | $ | 0.80 | ||||||||||||||||
Diluted | $ | 0.52 | $ | 0.33 | $ | 0.80 | $ | 0.59 | $ | 0.49 | $ | 0.52 | $ | 0.88 | $ | 0.80 | ||||||||||||||||
Average Number of | ||||||||||||||||||||||||||||||||
Common Shares Outstanding : | ||||||||||||||||||||||||||||||||
Basic | 16,388 | 16,332 | 16,371 | 16,316 | 16,519 | 16,388 | 16,474 | 16,371 | ||||||||||||||||||||||||
Diluted | 16,544 | 16,488 | 16,527 | 16,472 | 16,675 | 16,544 | 16,630 | 16,527 | ||||||||||||||||||||||||
Cash Dividends Paid per Common Share | $ | 0.2238 | $ | 0.2113 | $ | 0.4475 | $ | 0.4225 | $ | 0.2400 | $ | 0.2238 | $ | 0.4800 | $ | 0.4475 |
See Notes to Condensed Consolidated Financial Statements.
1
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, | December 31, | June 30, | December 31, | |||||||||||||||||
ASSETS | 2018 | 2017 | 2019 | 2018 | ||||||||||||||||
UTILITY PLANT: | Water Production | $ | 154,542 | $ | 153,844 | Water Production | $ | 157,634 | $ | 156,423 | ||||||||||
Transmission and Distribution | 480,265 | 468,649 | Transmission and Distribution | 525,843 | 512,202 | |||||||||||||||
General | 70,837 | 69,457 | General | 78,442 | 74,371 | |||||||||||||||
Construction Work in Progress | 26,517 | 11,562 | Construction Work in Progress | 56,215 | 32,878 | |||||||||||||||
TOTAL | 732,161 | 703,512 | TOTAL | 818,134 | 775,874 | |||||||||||||||
Less Accumulated Depreciation | 151,681 | 146,272 | Less Accumulated Depreciation | 163,890 | 157,387 | |||||||||||||||
UTILITY PLANT - NET | 580,480 | 557,240 | UTILITY PLANT - NET | 654,244 | 618,487 | |||||||||||||||
CURRENT ASSETS: | Cash and Cash Equivalents | 2,673 | 4,937 | Cash and Cash Equivalents | 2,990 | 3,705 | ||||||||||||||
Accounts Receivable, net | 11,011 | 10,785 | Accounts Receivable, net | 11,756 | 11,762 | |||||||||||||||
Unbilled Revenues | 8,744 | 6,999 | Unbilled Revenues | 8,245 | 7,293 | |||||||||||||||
Materials and Supplies (at average cost) | 4,826 | 4,118 | Materials and Supplies (at average cost) | 5,375 | 5,411 | |||||||||||||||
Prepayments | 3,805 | 2,408 | Prepayments | 3,917 | 2,644 | |||||||||||||||
TOTAL CURRENT ASSETS | 31,059 | 29,247 | TOTAL CURRENT ASSETS | 32,283 | 30,815 | |||||||||||||||
DEFERRED CHARGES | Operating Lease Right of Use Asset | 6,323 | — | |||||||||||||||||
AND OTHER ASSETS: | Preliminary Survey and Investigation Charges | 4,859 | 4,676 | Preliminary Survey and Investigation Charges | 2,116 | 5,254 | ||||||||||||||
Regulatory Assets | 99,717 | 58,423 | ||||||||||||||||||
Operations Contracts, Developer and Other Receivables | 439 | 439 | Regulatory Assets | 99,130 | 99,236 | |||||||||||||||
Restricted Cash | 3,157 | 1,460 | Restricted Cash | 1,170 | 1,956 | |||||||||||||||
Non-utility Assets - Net | 9,598 | 9,478 | Non-utility Assets - Net | 10,322 | 9,989 | |||||||||||||||
Other | 435 | 177 | Other | 1,983 | 2,093 | |||||||||||||||
TOTAL DEFERRED CHARGES AND OTHER ASSETS | 118,205 | 74,653 | TOTAL DEFERRED CHARGES AND OTHER ASSETS | 121,044 | 118,528 | |||||||||||||||
TOTAL ASSETS | $ | 729,744 | $ | 661,140 | TOTAL ASSETS | $ | 807,571 | $ | 767,830 | |||||||||||
CAPITALIZATION AND LIABILITIES | CAPITALIZATION AND LIABILITIES | CAPITALIZATION AND LIABILITIES | ||||||||||||||||||
CAPITALIZATION: | Common Stock, No Par Value | $ | 156,251 | 155,120 | Common Stock, No Par Value | $ | 165,138 | $ | 157,354 | |||||||||||
Retained Earnings | 79,826 | 74,055 | Retained Earnings | 98,146 | 91,433 | |||||||||||||||
TOTAL COMMON EQUITY | 236,077 | 229,175 | TOTAL COMMON EQUITY | 263,284 | 248,787 | |||||||||||||||
Preferred Stock | 2,433 | 2,433 | Preferred Stock | 2,433 | 2,433 | |||||||||||||||
Long-term Debt | 142,129 | 139,045 | Long-term Debt | 163,574 | 152,851 | |||||||||||||||
TOTAL CAPITALIZATION | 380,639 | 370,653 | TOTAL CAPITALIZATION | 429,291 | 404,071 | |||||||||||||||
CURRENT | Current Portion of Long-term Debt | 7,236 | 6,865 | Current Portion of Long-term Debt | 7,353 | 7,343 | ||||||||||||||
LIABILITIES: | Notes Payable | 39,000 | 28,000 | Notes Payable | 59,400 | 48,500 | ||||||||||||||
Accounts Payable | 16,413 | 13,929 | Accounts Payable | 18,056 | 19,325 | |||||||||||||||
Accrued Taxes | 14,700 | 11,418 | Accrued Taxes | 12,390 | 14,230 | |||||||||||||||
Accrued Interest | 1,259 | 1,093 | Accrued Interest | 1,279 | 1,289 | |||||||||||||||
Unearned Revenues and Advanced Service Fees | 974 | 951 | Unearned Revenues and Advanced Service Fees | 1,047 | 1,036 | |||||||||||||||
Other | 1,993 | 2,281 | Other | 3,007 | 2,640 | |||||||||||||||
TOTAL CURRENT LIABILITIES | 81,575 | 64,537 | TOTAL CURRENT LIABILITIES | 102,532 | 94,363 | |||||||||||||||
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7) | COMMITMENTS AND CONTINGENT LIABILITIES (Note 7) | COMMITMENTS AND CONTINGENT LIABILITIES (Note 7) | ||||||||||||||||||
DEFERRED CREDITS | Customer Advances for Construction | 21,832 | 21,423 | Customer Advances for Construction | 23,389 | 22,572 | ||||||||||||||
AND OTHER LIABILITIES: | Accumulated Deferred Income Taxes | 43,706 | 43,160 | Operating Lease Obligation | 6,084 | — | ||||||||||||||
Employee Benefit Plans | 35,128 | 36,686 | Accumulated Deferred Income Taxes | 48,617 | 47,270 | |||||||||||||||
Regulatory Liabilities | 83,298 | 43,745 | Employee Benefit Plans | 29,310 | 30,661 | |||||||||||||||
Other | 1,250 | 1,315 | Regulatory Liabilities | 73,957 | 79,112 | |||||||||||||||
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES | 185,214 | 146,329 | Other | 2,612 | 2,730 | |||||||||||||||
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES | 183,969 | 182,345 | ||||||||||||||||||
CONTRIBUTIONS IN AID OF CONSTRUCTION | CONTRIBUTIONS IN AID OF CONSTRUCTION | 82,316 | 79,621 | CONTRIBUTIONS IN AID OF CONSTRUCTION | 91,779 | 87,051 | ||||||||||||||
TOTAL CAPITALIZATION AND LIABILITIES | $ | 729,744 | $ | 661,140 | TOTAL CAPITALIZATION AND LIABILITIES | $ | 807,571 | $ | 767,830 |
See Notes to Condensed Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net Income | $ | 13,169 | $ | 9,822 | $ | 14,696 | $ | 13,169 | ||||||||
Adjustments to Reconcile Net Income to | ||||||||||||||||
Net Cash Provided by Operating Activities: | ||||||||||||||||
Depreciation and Amortization | 7,793 | 6,887 | 8,455 | 7,793 | ||||||||||||
Provision for Deferred Income Taxes | (2,760 | ) | 4,395 | |||||||||||||
Provision for Deferred Income Taxes and Investment Tax Credits | (5,075 | ) | (2,760 | ) | ||||||||||||
Equity Portion of Allowance for Funds Used During Construction (AFUDC) | (256 | ) | (205 | ) | (775 | ) | (256 | ) | ||||||||
Cash Surrender Value of Life Insurance | (60 | ) | (114 | ) | (200 | ) | (60 | ) | ||||||||
Stock Compensation Expense | 535 | 437 | 703 | 535 | ||||||||||||
Changes in Assets and Liabilities: | ||||||||||||||||
Accounts Receivable | (226 | ) | 176 | 6 | (226 | ) | ||||||||||
Unbilled Revenues | (1,745 | ) | (1,694 | ) | (952 | ) | (1,745 | ) | ||||||||
Materials & Supplies | (708 | ) | (787 | ) | 36 | (708 | ) | |||||||||
Prepayments | (1,397 | ) | (888 | ) | (1,273 | ) | (1,397 | ) | ||||||||
Accounts Payable | 2,484 | 2,702 | (1,269 | ) | 2,484 | |||||||||||
Accrued Taxes | 3,282 | 752 | (1,840 | ) | 3,282 | |||||||||||
Accrued Interest | 166 | (6 | ) | (10 | ) | 166 | ||||||||||
Employee Benefit Plans | (2,478 | ) | (640 | ) | (2,804 | ) | (2,478 | ) | ||||||||
Unearned Revenue & Advanced Service Fees | 23 | 44 | 11 | 23 | ||||||||||||
Other Assets and Liabilities | 1,401 | (710 | ) | 1,911 | 1,401 | |||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 19,223 | 20,171 | 11,620 | 19,223 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Utility Plant Expenditures, Including AFUDC of $125 in 2018, $94 in 2017 | (28,377 | ) | (21,165 | ) | ||||||||||||
Utility Plant Expenditures, Including AFUDC of $383 in 2019, $125 in 2018 | (35,698 | ) | (28,377 | ) | ||||||||||||
NET CASH USED IN INVESTING ACTIVITIES | (28,377 | ) | (21,165 | ) | (35,698 | ) | (28,377 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Redemption of Long-term Debt | (2,144 | ) | (2,115 | ) | (2,356 | ) | (2,144 | ) | ||||||||
Proceeds from Issuance of Long-term Debt | 5,567 | 4,047 | 13,217 | 5,567 | ||||||||||||
Net Short-term Bank Borrowings | 11,000 | 5,000 | 10,900 | 11,000 | ||||||||||||
Deferred Debt Issuance Expense | (75 | ) | (33 | ) | (1 | ) | (75 | ) | ||||||||
Common Stock Issuance Expense | (5 | ) | — | |||||||||||||
Proceeds from Issuance of Common Stock | 596 | 592 | 7,081 | 596 | ||||||||||||
Payment of Common Dividends | (7,325 | ) | (6,893 | ) | (7,906 | ) | (7,325 | ) | ||||||||
Payment of Preferred Dividends | (72 | ) | (72 | ) | (72 | ) | (72 | ) | ||||||||
Construction Advances and Contributions-Net | 1,040 | 278 | 1,719 | 1,040 | ||||||||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 8,587 | 804 | 22,577 | 8,587 | ||||||||||||
NET CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (567 | ) | (190 | ) | ||||||||||||
NET CHANGES IN CASH AND CASH EQUIVALENTS | (1,501 | ) | (567 | ) | ||||||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | 6,397 | 4,318 | 5,661 | 6,397 | ||||||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | 5,830 | $ | 4,128 | $ | 4,160 | $ | 5,830 | ||||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: | ||||||||||||||||
Utility Plant received as Construction Advances and Contributions | $ | 2,064 | $ | 1,131 | $ | 3,825 | $ | 2,064 | ||||||||
Long term Debt Deobligation | $ | 130 | $ | — | ||||||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||||||||||
Cash Paid During the Year for: | ||||||||||||||||
Interest | $ | 2,711 | $ | 2,594 | $ | 3,401 | $ | 2,711 | ||||||||
Interest Capitalized | $ | 125 | $ | 94 | $ | 383 | $ | 125 | ||||||||
Income Taxes | $ | 1,989 | $ | 714 | $ | 5,842 | $ | 1,989 |
See Notes to Condensed Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
(In thousands)
June 30, | December 31, | June 30, | December 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||||
Common Stock, No Par Value | Common Stock, No Par Value | |||||||||||||||||
Shares Authorized - 40,000 | ||||||||||||||||||
Shares Outstanding - 2018 - 16,392; 2017 - 16,352 | $ | 156,251 | $ | 155,120 | ||||||||||||||
Shares Outstanding - 2019 - 16,554; 2018 - 16,403 | $ | 165,138 | $ | 157,354 | ||||||||||||||
Retained Earnings | 79,826 | 74,055 | 98,146 | 91,433 | ||||||||||||||
TOTAL COMMON EQUITY | $ | 236,077 | $ | 229,175 | $ | 263,284 | $ | 248,787 | ||||||||||
Cumulative Preferred Stock, No Par Value: | ||||||||||||||||||
Shares Authorized - 126 | ||||||||||||||||||
Shares Outstanding - 24 | ||||||||||||||||||
Shares Outstanding - 23 | ||||||||||||||||||
Convertible: | ||||||||||||||||||
Shares Outstanding, $7.00 Series - 10 | 1,005 | 1,005 | 1,005 | 1,005 | ||||||||||||||
Shares Outstanding, $8.00 Series - 3 | 349 | 349 | 349 | 349 | ||||||||||||||
Nonredeemable: | ||||||||||||||||||
Shares Outstanding, $7.00 Series - 1 | 79 | 79 | 79 | 79 | ||||||||||||||
Shares Outstanding, $4.75 Series - 10 | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||||
TOTAL PREFERRED STOCK | $ | 2,433 | $ | 2,433 | $ | 2,433 | $ | 2,433 | ||||||||||
Long-term Debt: | ||||||||||||||||||
8.05%, Amortizing Secured Note, due December 20, 2021 | $ | 1,055 | $ | 1,180 | $ | 786 | $ | 924 | ||||||||||
6.25%, Amortizing Secured Note, due May 19, 2028 | 4,165 | 4,375 | 3,745 | 3,955 | ||||||||||||||
6.44%, Amortizing Secured Note, due August 25, 2030 | 3,407 | 3,547 | 3,127 | 3,267 | ||||||||||||||
6.46%, Amortizing Secured Note, due September 19, 2031 | 3,687 | 3,827 | 3,407 | 3,547 | ||||||||||||||
4.22%, State Revolving Trust Note, due December 31, 2022 | 253 | 279 | 202 | 228 | ||||||||||||||
3.60%, State Revolving Trust Note, due May 1, 2025 | 1,743 | 1,851 | 1,519 | 1,632 | ||||||||||||||
3.30% State Revolving Trust Note, due March 1, 2026 | 372 | 392 | 330 | 351 | ||||||||||||||
3.49%, State Revolving Trust Note, due January 25, 2027 | 408 | 427 | 369 | 389 | ||||||||||||||
4.03%, State Revolving Trust Note, due December 1, 2026 | 527 | 553 | 474 | 501 | ||||||||||||||
4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021 | 162 | 162 | 111 | 111 | ||||||||||||||
0.00%, State Revolving Fund Bond, due August 1, 2021 | 124 | 128 | 85 | 88 | ||||||||||||||
3.64%, State Revolving Trust Note, due July 1, 2028 | 246 | 256 | 225 | 235 | ||||||||||||||
3.64%, State Revolving Trust Note, due January 1, 2028 | 80 | 84 | 73 | 77 | ||||||||||||||
3.45%, State Revolving Trust Note, due August 1, 2031 | 935 | 962 | 880 | 907 | ||||||||||||||
6.59%, Amortizing Secured Note, due April 20, 2029 | 3,779 | 3,953 | 3,430 | 3,604 | ||||||||||||||
7.05%, Amortizing Secured Note, due January 20, 2030 | 2,896 | 3,021 | 2,646 | 2,771 | ||||||||||||||
5.69%, Amortizing Secured Note, due January 20, 2030 | 5,940 | 6,197 | 5,427 | 5,684 | ||||||||||||||
4.45%, Amortizing Secured Note, due April 20, 2040 | 9,607 | 9,827 | 9,167 | 9,387 | ||||||||||||||
4.47%, Amortizing Secured Note, due April 20, 2040 | 3,566 | 3,646 | 3,401 | 3,483 | ||||||||||||||
3.75%, State Revolving Trust Note, due July 1, 2031 | 2,015 | 2,075 | 1,892 | 1,954 | ||||||||||||||
2.00%, State Revolving Trust Note, due February 1, 2036 | 1,090 | 1,115 | 1,039 | 1,064 | ||||||||||||||
3.75%, State Revolving Trust Note, due November 30, 2030 | 1,057 | 1,090 | 990 | 1,024 | ||||||||||||||
0.00% Construction Loans | — | 3,874 | 29,726 | 16,509 | ||||||||||||||
First Mortgage Bonds: | ||||||||||||||||||
0.00%, Series X, due August 1, 2018 | 54 | 55 | ||||||||||||||||
4.25% to 4.63%, Series Y, due August 1, 2018 | 61 | 61 | ||||||||||||||||
0.00%, Series Z, due August 1, 2019 | 221 | 224 | 113 | 113 | ||||||||||||||
5.25% to 5.75%, Series AA, due August 1, 2019 | 300 | 300 | 155 | 155 | ||||||||||||||
0.00%, Series BB, due August 1, 2021 | 471 | 482 | 354 | 362 | ||||||||||||||
4.00% to 5.00%, Series CC, due August 1, 2021 | 636 | 636 | 489 | 489 | ||||||||||||||
0.00%, Series EE, due August 1, 2023 | 2,231 | 2,296 | 1,818 | 1,876 | ||||||||||||||
3.00% to 5.50%, Series FF, due August 1, 2024 | 3,495 | 3,495 | 2,980 | 2,980 | ||||||||||||||
0.00%, Series GG, due August 1, 2026 | 799 | 813 | 710 | 723 | ||||||||||||||
4.00% to 5.00%, Series HH, due August 1, 2026 | 880 | 880 | 795 | 795 | ||||||||||||||
0.00%, Series II, due August 1, 2024 | 594 | 610 | 506 | 520 | ||||||||||||||
3.40% to 5.00%, Series JJ, due August 1, 2027 | 750 | 750 | 671 | 671 | ||||||||||||||
0.00%, Series KK, due August 1, 2028 | 969 | 988 | 880 | 898 | ||||||||||||||
5.00% to 5.50%, Series LL, due August 1, 2028 | 1,095 | 1,095 | 1,010 | 1,010 | ||||||||||||||
0.00%, Series MM, due August 1, 2030 | 1,203 | 1,237 | 1,103 | 1,137 | ||||||||||||||
3.00% to 4.375%, Series NN, due August 1, 2030 | 1,505 | 1,505 | 1,285 | 1,415 | ||||||||||||||
0.00%, Series OO, due August 1, 2031 | 2,057 | 2,107 | 1,906 | 1,956 | ||||||||||||||
2.00% to 5.00%, Series PP, due August 1, 2031 | 740 | 740 | 700 | 700 | ||||||||||||||
5.00%, Series QQ, due October 1, 2023 | 9,915 | 9,915 | 9,915 | 9,915 | ||||||||||||||
3.80%, Series RR, due October 1, 2038 | 22,500 | 22,500 | 22,500 | 22,500 | ||||||||||||||
4.25%, Series SS, due October 1, 2047 | 23,000 | 23,000 | 23,000 | 23,000 | ||||||||||||||
0.00%, Series TT, due August 1, 2032 | 2,208 | 2,258 | 2,057 | 2,107 | ||||||||||||||
3.00% to 3.25%, Series UU, due August 1, 2032 | 845 | 845 | 800 | 800 | ||||||||||||||
0.00%, Series VV, due August 1, 2033 | 2,243 | 2,290 | 2,099 | 2,147 | ||||||||||||||
3.00% to 5.00%, Series WW, due August 1, 2033 | 830 | 830 | 795 | 795 | ||||||||||||||
0.00%, Series XX, due August 1, 2047 | 11,259 | 11,259 | 10,880 | 11,006 | ||||||||||||||
3.00% to 5.00%, Series YY, due August 1, 2047 | 3,860 | 3,860 | 3,860 | 3,860 | ||||||||||||||
0.00%, Series 2018A, due August 1, 2047 | 7,076 | — | 6,837 | 6,917 | ||||||||||||||
3.00% to 5.00%, Series 2018B, due August 1, 2047 | 2,365 | — | ||||||||||||||||
3.00%-5.00%, Series 2018B, due August 1, 2047 | 2,365 | 2,365 | ||||||||||||||||
SUBTOTAL LONG-TERM DEBT | 151,276 | 147,852 | 173,634 | 162,904 | ||||||||||||||
Add: Premium on Issuance of Long-term Debt | 1,369 | 1,367 | 1,150 | 1,259 | ||||||||||||||
Less: Unamortized Debt Expense | (3,280 | ) | (3,309 | ) | (3,857 | ) | (3,969 | ) | ||||||||||
Less: Current Portion of Long-term Debt | (7,236 | ) | (6,865 | ) | (7,353 | ) | (7,343 | ) | ||||||||||
TOTAL LONG-TERM DEBT | $ | 142,129 | $ | 139,045 | $ | 163,574 | $ | 152,851 |
See Notes to Condensed Consolidated Financial Statements.
4
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Common | Common | |||||||||||||||
Stock | Stock | Retained | ||||||||||||||
Shares | Amount | Earnings | Total | |||||||||||||
For the Three Months Ended June 30, 2018 | ||||||||||||||||
Balance at April 1, 2018 | 16,358 | $ | 155,580 | $ | 74,855 | $ | 230,435 | |||||||||
Net Income | — | — | 8,675 | 8,675 | ||||||||||||
Dividend Reinvestment & Common Stock Purchase Plan | 7 | 310 | — | 310 | ||||||||||||
Restricted Stock Award, Net - Employees | 23 | 214 | — | 214 | ||||||||||||
Stock Award - Board Of Directors | 4 | 147 | — | 147 | ||||||||||||
Shares Forefeited | — | — | — | |||||||||||||
Cash Dividends on Common Stock | — | — | (3,666 | ) | (3,666 | ) | ||||||||||
Cash Dividends on Preferred Stock | — | — | (36 | ) | (36 | ) | ||||||||||
Balance at June 30, 2018 | 16,392 | $ | 156,251 | $ | 79,828 | $ | 236,079 | |||||||||
For the Six Months Ended June 30, 2018 | ||||||||||||||||
Balance at January 1, 2018 | 16,352 | $ | 155,120 | $ | 74,056 | $ | 229,176 | |||||||||
Net Income | — | — | 13,169 | 13,169 | ||||||||||||
Dividend Reinvestment & Common Stock Purchase Plan | 15 | 596 | — | 596 | ||||||||||||
Restricted Stock Award, Net - Employees | 23 | 388 | — | 388 | ||||||||||||
Stock Award - Board Of Directors | 4 | 147 | — | 147 | ||||||||||||
Shares Forefeited | (2 | ) | — | — | — | |||||||||||
Cash Dividends on Common Stock | — | — | (7,325 | ) | (7,325 | ) | ||||||||||
Cash Dividends on Preferred Stock | — | — | (72 | ) | (72 | ) | ||||||||||
Balance at June 30, 2018 | 16,392 | $ | 156,251 | $ | 79,828 | $ | 236,079 | |||||||||
For the Three Months Ended June 30, 2019 | ||||||||||||||||
Balance at April 1, 2019 | 16,451 | $ | 160,142 | $ | 94,000 | $ | 254,142 | |||||||||
Net Income | — | — | 8,146 | 8,146 | ||||||||||||
Dividend Reinvestment & Common Stock Purchase Plan | 82 | 4,522 | — | 4,522 | ||||||||||||
Restricted Stock Award, Net - Employees | 17 | 278 | — | 278 | ||||||||||||
Stock Award - Board Of Directors | 4 | 196 | — | 196 | ||||||||||||
Cash Dividends on Common Stock | — | — | (3,964 | ) | (3,964 | ) | ||||||||||
Cash Dividends on Preferred Stock | — | — | (36 | ) | (36 | ) | ||||||||||
Balance at June 30, 2019 | 16,554 | $ | 165,138 | $ | 98,146 | $ | 263,284 | |||||||||
For the Six Months Ended June 30, 2019 | ||||||||||||||||
Balance at January 1, 2019 | 16,403 | $ | 157,354 | $ | 91,433 | $ | 248,787 | |||||||||
Net Income | — | — | 14,696 | 14,696 | ||||||||||||
Dividend Reinvestment & Common Stock Purchase Plan | 130 | 7,081 | — | 7,081 | ||||||||||||
Restricted Stock Award, Net - Employees | 17 | 507 | — | 507 | ||||||||||||
Stock Award - Board Of Directors | 4 | 196 | — | 196 | ||||||||||||
Cash Dividends on Common Stock | — | — | (7,906 | ) | (7,906 | ) | ||||||||||
Cash Dividends on Preferred Stock | — | — | (72 | ) | (72 | ) | ||||||||||
Common Stock Expenses | — | — | (5 | ) | (5 | ) | ||||||||||
Balance at June 30, 2019 | 16,554 | $ | 165,138 | $ | 98,146 | $ | 263,284 |
See Notes to Condensed Consolidated Financial Statements.
5
MIDDLESEX WATER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation and Recent Developments
Middlesex Water Company (Middlesex or the Company) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Tidewater Environmental Services, Inc. (TESI), Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc. (USA-PA), and Twin Lakes Utilities, Inc. (Twin Lakes). Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh) are wholly-owned subsidiaries of Tidewater. The financial statements for Middlesex and its wholly-owned subsidiaries (the Company) are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.
The consolidated notes within the 20172018 Annual Report on Form 10-K (the 2017(2018 Form 10-K) are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of June 30, 2018,2019 and the results of operations and cash flows for the three month and six month periods ended June 30, 20182019 and 2017 and cash flows for the six month periods ended June 30, 2018 and 2017.2018. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2017,2018, has been derived from the Company’s audited financial statements for the year ended December 31, 20172018 included in the 20172018 Form 10-K.
Recent Developments
USA-PA currently operates the City of Perth Amboy, New Jersey’s water and wastewater systems under a 20-year agreement, which expires in December 2018. In July 2018, through a competitive proposal process, USA-PA was awarded a $67 million base professional services contract to continue to operate the water and wastewater systems through December 31, 2028.
RecentRecently Adopted Accounting Guidance
Revenue RecognitionLeases - - In May 2014,On January 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) issued guidance which replaces most of the existing guidance with a single set of principles for recognizing revenue from contracts with customers. The guidance was effective January 1, 2018 and did not have a material impact on the Company’s financial statements. Disclosures related to Revenue Recognition are included in Note 9,Revenue Recognition from Contracts with Customers.
Recognition and Measurement of Financial Assets and Financial Liabilities- In January 2016, the FASB issued guidance which (i) requires all investments in equity securities, including other ownership interests such as partnerships, unincorporated joint ventures and limited liability companies, to be carried at fair value through net income, (ii) requires an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option has been elected, (iii) amends several disclosure requirements, including the methods and significant assumptions used to estimate fair value or a description of the changes in the methods and assumptions used to estimate fair value, and (iv) requires disclosure of the fair value of financial assets and liabilities measured at amortized cost at the amount that would be received to sell the asset or paid to transfer the liability. The guidance was effective January 1, 2018 and did not have a material impact on the Company’s financial statements.
5
Statement of Cash Flows -In August 2016, the FASB issued guidance which amends the previous guidance on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the amendment is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The guidance was effective January 1, 2018 and did not have a material impact on the Company’s financial statements.
Restricted Cash -In November 2016, the FASB issued guidance related to the classification and presentation of restricted cash in the statement of cash flows, which requires entities to a) include restricted cash balances in its cash and cash-equivalent balances in the statement of cash flows and b) include a reconciliation of cash and cash-equivalents per the statement of financial position as compared to the statement of cash flows. Changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents will not be presented as cash flow activities in the statement of cash flows. In addition, an entity with a material balance of amounts described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The guidance was effective January 1, 2018 and did not have a material impact on the Company’s financial statements. As a result of adopting this guidance, the consolidated statement of cash flows for the six months ended June 30, 2017 was revised, which resulted in a $0.4 million increase in Cash, Cash Equivalents and Restricted Cash at the Beginning and End of the Period.
Employee Benefit Plans-Net Periodic Benefit Cost –In March 2017, the FASB issued guidance which requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the guidance requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The guidance was effective January 1, 2018 and did not have a material impact on the Company’s financial statements. See Note 8,Employee Benefit Plansfor more information. As a result of adopting this guidance, the consolidated statement of income for the three and six months ended June 30, 2017 was revised, which resulted in increases in Operations and Maintenance expense and Other Income (Expense), net of $0.2 million and $0.4 million, respectively.
Leases -In February 2016, the FASB issued guidance related to leases which will requirerequired lessees to recognize a lease liability (a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis) and a right-of-use asset (an asset that representsasset. The Company elected the lessee’s rightoptional transition method of adoption option to use, or controlapply the userequirements of a specified asset for the lease term). In January 2018,standard in the FASB issued additionalperiod of adoption with no restatement of prior periods. The Company utilized the package of transition practical expedients provided by the new guidance, including carrying forward prior conclusions related to contracts that contain leases which permitsand lease classification. The Company also utilized the transition practical expedient permitting entities to forgo the evaluation of existing land easement arrangements to determine if they contain a lease as part of the adoption of this guidance.lease. Land easement arrangements, or modifications to existing arrangements, entered into after adoption of this guidance will need to be evaluated to determine if they meet the definition of a lease. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements and footnote disclosures, but, based on the Company’s current leasing activity, does not expect the adoption of this guidance to haveresulted in the recording of a material impact$6.7 million right-of-use asset, a $7.1 million lease liability and a $0.4 million regulatory asset on the Company’s financial statements.consolidated balance sheet as of January 1, 2019. For further discussion, see “Leases” inNote 7 – Commitments and Contingent Liabilities.
There are no other new adopted or proposed accounting guidance that the Company is aware of that could have a material impact on the Company’s financial statements.
Note 2–Rate and Regulatory Matters
Middlesex –In MarchDecember 2018, Middlesex’s petition to the New Jersey Board of Public Utilities (NJBPU) approved Middlesex’s petition to establish its Purchased Water Adjustment Clause (PWAC) tariff rate to recover additional annual costs of less than $0.1 million, primarily for the purchase of treated water from a non-affiliated water utility regulated by the NJBPU. A PWAC is a rate mechanism that allows for recovery of increased purchased water costs between base rate case filings. The PWAC is reset to zero once those increased costs are included in base rates. The PWAC tariff rate became effective on January 1, 2019.
Tidewater -Effective July 1, 2019, Tidewater reset its Delaware Public Service Commission (DEPSC) approved Distribution System Improvement Charge rate, which is expected to generate revenues of approximately $0.5 million annually.
6
In February 2019, Tidewater received approval from the DEPSC to reduce its rates, effective March 1, 2019, to reflect the lower corporate income tax rate enacted by theTax Cuts and Jobs Act of 2017 (Tax Act), resulting in an overall rate decrease of 3.35%, or $1.0 million of revenues, on an annual basis. The DEPSC also approved a one-time credit of $0.7 million to customers’ accounts related to the lower corporate income tax rate.
Pinelands -In March 2019, Pinelands Water and Pinelands Wastewater filed separate petitions with the NJBPU seeking permission to increase its base water rates was concluded, based on a negotiated settlement, resulting in an increase in annual operating revenues of $5.5 million. In its initial October 2017 filing with the NJBPU, Middlesex had sought an increase of $15.3by approximately $0.2 million to recover costs forand $0.5 million per year, respectively. These requests were necessitated by capital infrastructure investments Middlesexboth companies have made, or have committed to make, and increased operations and maintenance costs. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the requests. A decision by the NJBPU in either matter is not expected before the fourth quarter of 2019.
Twin Lakes -In July 2019, Twin Lakes filed a petition with the Pennsylvania Public Utilities Commission (PAPUC) seeking permission to increase base rates by approximately $0.2 million per year. This request was necessitated by capital infrastructure investments Twin Lakes has made, or has committed to make, to drinking water infrastructure since the last filing in New Jersey in 2015 as well asand increased operations and maintenance costs. DuringWe cannot predict whether the pendency of this rate matter,PAPUC will ultimately approve, deny, or reduce the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law. Under the Tax Act the maximum corporate income tax rate was reduced from 35% to 21% effective January 1, 2018. Because income tax is oneamount of the cost components used to determine a regulated utility’s revenue requirement, Middlesex was able to reduce its original rate increase request by $4.9 million to $10.4 million. The new base water rates are designed to recover the increased operating costs as well as a return on invested capital in rate base of $245.5 million, based on an authorized return on equity of 9.6%. As part of the settlement, Middlesex received approval for regulatory accounting treatment of accumulated deferred income tax benefits associated with required adoption of tangible property regulations issuedrequest. A decision by the Internal Revenue Service (IRS). The settlement agreement allowed for a four-year amortization period for $28.7 millionPAPUC is not expected before the first quarter of deferred income tax benefits as well as immediate and prospective recognition of the tangible property regulations tax benefits in future years. The rate increase became effective April 1, 2018.
6
Tidewater -Effective July 1, 2018, Tidewater revised its Delaware Public Service Commission (DEPSC)-approved Distribution System Improvement Charge (DSIC) rate, which is expected to generate $0.2 million of revenues in 2018. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements to their water distribution system made between base rate proceedings.
Tax Act -On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code, including a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. Tariff rates charged to customers in the Company’s regulated companies include recovery of income taxes at the statutory rate in effect at the time those rates became effective. The conclusion of Middlesex’s base rate case and the resulting rates implemented April 1, 2018 reflect the impact of the Tax Act on its revenue requirement.
In March 2018, the Company submitted compliance filings with the DEPSC proposing to reduce rates charged to its Delaware customers to reflect the impact of the Tax Act. It is uncertain at this time when the DEPSC will act upon the rate reduction proposals or whether it will accept the proposed methodologies.
As of June 30, 2018, the Company has recorded regulatory liabilities of $32.6 million for excess income taxes collected through rates due to the lower income tax rate under the Tax Act. These regulatory liabilities are overwhelmingly related to accelerated tax depreciation deduction timing differences, which are subject to IRS normalization rules. The IRS rules limit how quickly the excess taxes attributable to accelerated tax depreciation can be returned to customers.2020.
Note 3 – Capitalization
Common Stock -During the six months ended June 30, 20182019 and 2017,2018, there were 15,026129,675 common shares (approximately $0.6($7.1 million) and 15,95415,026 common shares (approximately $0.6 million), respectively, respectively, issued under the Middlesex Water Company Investment Plan (Investment Plan). On January 2, 2019, the Company began offering shares of its common stock for purchase at a 5% discount to participants in the Investment Plan. The discount offering will continue until 200,000 shares are purchased at the discounted price or December 30, 2019, whichever event occurs first. The discount applies to all common stock purchases made under the Investment Plan, whether by optional cash payment or by dividend reinvestment.
In May 2019, Middlesex received approval from the NJBPU to issue and sell up to 1,500,000 shares of its common stock in one or more transactions through December 31, 2022. Sales of additional shares of common stock are part of the Company’s comprehensive financing plan to fund its multi-year utility plant infrastructure investment program. As described below in “Long-term Debt”, the NJBPU approved the New Jersey Economic Development Authority (NJEDA) debt funding component of the financing plan.
Long-term Debt -In April 2018,Subject to regulatory approval, the NJBPU approved Middlesex’s requestCompany periodically issues long-term debt to borrow up to $57.0 millionfund its investments in utility plant and other assets. To the extent possible, the Company finances qualifying capital projects under State Revolving Fund (SRF) loan programs in New Jersey and Delaware. These government programs provide financing at interest rates that are typically below rates available in the broader financial markets. A portion of the borrowings under the New Jersey SRF is interest-free. Under the New Jersey SRF program, borrowers first enter into a construction loan agreement with the New Jersey Infrastructure Bank (NJIB) program to fund the construction ofat a large-diameter transmission pipeline from the Carl J. Olsen (CJO) water treatment plant and interconnect with our distribution system. Middlesex currently expects to close on the NJIB construction loan in the third quarter of 2018 with funding requisitions beginning in August 2018 through the end of 2019.
In April 2018, the NJBPU approved Middlesex’s request to borrow up to $55.0 million under the NJIB program to fund upgrades to the Company’s CJO water treatment plant. Middlesex currently expects to close on the NJIB construction loan in the fourth quarter of 2018 with funding requisitions beginning late in 2018 and through 2020.
In March 2018, the NJBPU approved Middlesex’s request to borrow up to $14.0 million under the NJIB program to fund the 2018 RENEW Program, which is an ongoing initiative to eliminate all unlined water distribution mains in the Middlesex system. Middlesex expects to close on the NJIB construction loan in the third quarter of 2018 with funding requisitions beginning in September 2018 through early 2019.
7
In March 2018, the DEPSC approved Tidewater’s request to borrow up to $0.9 million under the Delaware State Revolving Fund (SRF) program to fund the replacement of an entire water distribution system of a small Delaware subdivision. Tidewater closed on the SRF loan in May 2018 and expects to complete the project in the fourth quarter of 2018.
In November 2017, Middlesex closed out three of its NJIB construction loans (booster station upgrade, RENEW 2015 and RENEW 2016 projects) by issuing to the NJIB first mortgage bonds designated as Series XX ($11.3 million) and Series YY ($3.9 million).below market interest rate. The current interest rate on the Series XX bondconstruction loan borrowings is zero andpercent (0%). When construction on the qualifying project is substantially complete, NJIB will coordinate the conversion of the construction loan into a long-term securitized loan with a portion of the principal balance having a stated interest rate onof zero percent (0%) and a portion of the Series YY bond range between 3.0% and 5.0%. Through June 30, 2018, Middlesex has drawn down $14.9 million and expectsprincipal balance at a market interest rate at the time of closing using the credit rating of the State of New Jersey. The current term of the long-term loans offered through the NJIB is up to draw downthirty years. The current portion of the principal balance having a stated interest rate of zero percent (0%) is 75% with the remaining proceeds duringportion of 25% having a market based interest rate.
7
The NJIB generally schedules its long-term debt financings in May and November. Middlesex currently has two projects that are in the third quarterconstruction loan phase of 2018. The final maturity date for both bonds is August 1, 2047, with scheduled debt service payments over the life of the loan.New Jersey SRF program:
1) | In April 2018, the NJBPU approved Middlesex’s request to participate in the NJIB loan program to fund the construction of a large-diameter transmission pipeline from the CJO water treatment plant and interconnect with our distribution system. Middlesex closed on a $43.5 million NJIB interest-free construction loan in August 2018. Through June 30, 2019, Middlesex has drawn a total of $22.5 million and expects to draw down the remaining proceeds through the first quarter of 2020. |
2) | In March 2018, the NJBPU approved Middlesex’s request to borrow up to $14.0 million under the NJIB program to fund the 2018 RENEW Program, which is an ongoing initiative to eliminate all unlined water distribution mains in the Middlesex system. Middlesex closed on an $8.7 million NJIB construction loan in September 2018. Through June 30, 2019, Middlesex has drawn a total of $7.2 million and expects to draw the remaining proceeds during the remainder of 2019. The NJIB has informed the Company that the RENEW 2018 interest-free construction loan is scheduled for the May 2020 long-term debt financing program. |
In May 2018, Middlesex closed outrepaid its $9.5 million RENEW 2017 interest-free construction loan by issuing to the NJIB first mortgage bonds designated as Series 2018A ($7.1 million) and Series 2018B ($2.4 million). The interest rate on the Series 2018A bond is zero and the interest rate on the Series 2018B bond ranges between 3.0% and 5.0%. Through June 30, 2018,2019, Middlesex has drawn down $7.1a total of $8.9 million and expects to draw down the remaining proceedsfinish drawing on this loan during the third quarter of 2018.2019. The final maturity date for both bonds is August 1, 2047, with scheduled debt service payments over the life of the loan.loans.
In order to help ensure adherence to its comprehensive financing plan, Middlesex received approval from the NJBPU in February 2019 to issue and sell up to $140 million of First Mortgage Bonds (FMB) through the NJEDA in one or more transactions through December 31, 2022. Because the interest paid to the bondholders is exempt from federal and New Jersey income taxes, the interest rate on FMB issued through the NJEDA is generally lower than otherwise achievable in the traditional taxable corporate bond market. However, the interest is subject to the Alternative Minimum Tax. Middlesex has selected an underwriter to market and sell up to $60 million of FMB in August 2019.
In March 2018, the DEPSC approved Tidewater’s request to borrow up to $0.9 million under the Delaware SRF program to fund the replacement of an entire water distribution system of a small Delaware subdivision. Tidewater closed on this SRF loan in May 2018. In April 2019, Tidewater received approval from the DEPSC to increase the borrowing to $1.7 million based on revised project cost estimates. Tidewater expects to close on this additional SRF loan in August 2019 and expects to draw down on the loan beginning in the fourth quarter of 2019 through the second quarter of 2020.
In 2019, the NJIB de-obligated principal payments of $0.1 million on Series NN of the Company’s First Mortgage Bonds.
Fair Value of Financial Instruments - The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate that value. The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade receivables, accounts payable and notes payable approximate their respective fair values due to the short-term maturities of these instruments. The fair value of First MortgageFMB and State Revolving Fund Bonds (collectively, the Bonds) issued by Middlesex is based on quoted market prices for similar issues. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes
8
payable and the Bonds in the table below are classified as Level 2 measurements. The carrying amount and fair value of the Bonds were as follows:
June 30, 2018 | December 31, 2017 | |||
Carrying | Fair | Carrying | Fair | |
Amount | Value | Amount | Value | |
Bonds | $ 104,449 | $ 106,188 | $95,322 | $98,036 |
June 30, 2019 | December 31, 2018 | |||
Carrying | Fair | Carrying | Fair | |
Amount | Value | Amount | Value | |
Bonds | $100,780 | $103,550 | $101,411 | $102,789 |
For other long-term debt for which there was no quoted market price and there is not an active trading market, it was not practicable to estimate their fair value (for details, including carrying value, interest rate and due date on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note”, “State Revolving Trust Note” and “Construction Loans” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $46.8$72.9 million and $52.5$61.5 million at June 30, 20182019 and December 31, 2017,2018, respectively. Customer advances for construction have carrying amounts of $21.8$23.4 million and $21.4$22.6 million at June 30, 20182019 and December 31, 2017,2018, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.
8
Note 4 – Earnings Per Share
Basic earnings per share (EPS) are computed on the basis of the weighted average number of shares outstanding during the period presented. Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock $8.00 Series.
(In Thousands Except per Share Amounts) | (In Thousands Except per Share Amounts) | |||||||||||||||||||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||
Basic: | Income | Shares | Income | Shares | Income | Shares | Income | Shares | ||||||||||||||||||||||||
Net Income | $ | 8,675 | 16,388 | $ | 5,381 | 16,332 | $ | 8,146 | 16,519 | $ | 8,675 | 16,388 | ||||||||||||||||||||
Preferred Dividend | (36 | ) | (36 | ) | (36 | ) | (36 | ) | ||||||||||||||||||||||||
Earnings Applicable to Common Stock | $ | 8,639 | 16,388 | $ | 5,345 | 16,332 | $ | 8,110 | 16,519 | $ | 8,639 | 16,388 | ||||||||||||||||||||
Basic EPS | $ | 0.53 | $ | 0.33 | $ | 0.49 | $ | 0.53 | ||||||||||||||||||||||||
Diluted: | ||||||||||||||||||||||||||||||||
Earnings Applicable to Common Stock | $ | 8,639 | 16,388 | $ | 5,345 | 16,332 | $ | 8,110 | 16,519 | $ | 8,639 | 16,388 | ||||||||||||||||||||
$7.00 Series Preferred Dividend | 17 | 115 | 17 | 115 | 17 | 115 | 17 | 115 | ||||||||||||||||||||||||
$8.00 Series Preferred Dividend | 6 | 41 | 6 | 41 | 6 | 41 | 6 | 41 | ||||||||||||||||||||||||
Adjusted Earnings Applicable to Common Stock | $ | 8,662 | 16,544 | $ | 5,368 | 16,488 | $ | 8,133 | 16,675 | $ | 8,662 | 16,544 | ||||||||||||||||||||
Diluted EPS | $ | 0.52 | $ | 0.33 | $ | 0.49 | $ | 0.52 |
(In Thousands Except per Share Amounts) | ||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Basic: | Income | Shares | Income | Shares | ||||||||||||
Net Income | $ | 13,169 | 16,371 | $ | 9,822 | 16,316 | ||||||||||
Preferred Dividend | (72 | ) | (72 | ) | ||||||||||||
Earnings Applicable to Common Stock | $ | 13,097 | 16,371 | $ | 9,750 | 16,316 | ||||||||||
Basic EPS | $ | 0.80 | $ | 0.60 | ||||||||||||
Diluted: | ||||||||||||||||
Earnings Applicable to Common Stock | $ | 13,097 | 16,371 | $ | 9,750 | 16,316 | ||||||||||
$7.00 Series Preferred Dividend | 34 | 115 | 34 | 115 | ||||||||||||
$8.00 Series Preferred Dividend | 12 | 41 | 12 | 41 | ||||||||||||
Adjusted Earnings Applicable to Common Stock | $ | 13,143 | 16,527 | $ | 9,796 | 16,472 | ||||||||||
Diluted EPS | $ | 0.80 | $ | 0.59 |
9
(In Thousands Except per Share Amounts) | ||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Basic: | Income | Shares | Income | Shares | ||||||||||||
Net Income | $ | 14,696 | 16,474 | $ | 13,169 | 16,371 | ||||||||||
Preferred Dividend | (72 | ) | (72 | ) | ||||||||||||
Earnings Applicable to Common Stock | $ | 14,624 | 16,474 | $ | 13,097 | 16,371 | ||||||||||
Basic EPS | $ | 0.89 | $ | 0.80 | ||||||||||||
Diluted: | ||||||||||||||||
Earnings Applicable to Common Stock | $ | 14,624 | 16,474 | $ | 13,097 | 16,371 | ||||||||||
$7.00 Series Preferred Dividend | 34 | 115 | 34 | 115 | ||||||||||||
$8.00 Series Preferred Dividend | 12 | 41 | 12 | 41 | ||||||||||||
Adjusted Earnings Applicable to Common Stock | $ | 14,670 | 16,630 | $ | 13,143 | 16,527 | ||||||||||
Diluted EPS | $ | 0.88 | $ | 0.80 |
Note 5 – Business Segment Data
The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey, Delaware and Pennsylvania. This segment also includes regulated wastewater systems in New Jersey and Delaware. The Company is subject to regulations as to its rates, services and other matters by New Jersey, Delaware and Pennsylvania with respect to utility services within these states. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender.
(In Thousands) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Operations by Segments: | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues: | ||||||||||||||||
Regulated | $ | 31,168 | $ | 29,278 | $ | 58,374 | $ | 55,771 | ||||||||
Non – Regulated | 3,882 | 3,863 | 7,982 | 7,613 | ||||||||||||
Inter-segment Elimination | (131 | ) | (127 | ) | (260 | ) | (239 | ) | ||||||||
Consolidated Revenues | $ | 34,919 | $ | 33,014 | $ | 66,096 | $ | 63,145 | ||||||||
Operating Income: | ||||||||||||||||
Regulated | $ | 9,988 | $ | 8,672 | $ | 15,613 | $ | 15,687 | ||||||||
Non – Regulated | 733 | 686 | 1,458 | 1,246 | ||||||||||||
Consolidated Operating Income | $ | 10,721 | $ | 9,358 | $ | 17,071 | $ | 16,933 | ||||||||
Net Income: | ||||||||||||||||
Regulated | $ | 8,151 | $ | 4,972 | $ | 12,134 | $ | 9,111 | ||||||||
Non – Regulated | 524 | 409 | 1,035 | 711 | ||||||||||||
Consolidated Net Income | $ | 8,675 | $ | 5,381 | $ | 13,169 | $ | 9,822 | ||||||||
Capital Expenditures: | ||||||||||||||||
Regulated | $ | 18,350 | $ | 11,588 | $ | 28,328 | $ | 21,160 | ||||||||
Non – Regulated | 16 | — | 49 | 5 | ||||||||||||
Total Capital Expenditures | $ | 18,366 | $ | 11,588 | $ | 28,377 | $ | 21,165 | ||||||||
As of | As of | |||||||||||||||
June 30, | December 31, | |||||||||||||||
2018 | 2017 | |||||||||||||||
Assets: | ||||||||||||||||
Regulated | $ | 732,592 | $ | 661,816 | ||||||||||||
Non – Regulated | 6,819 | 7,093 | ||||||||||||||
Inter-segment Elimination | (9,667 | ) | (7,769 | ) | ||||||||||||
Consolidated Assets | $ | 729,744 | $ | 661,140 |
10
(In Thousands) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Operations by Segments: | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues: | ||||||||||||||||
Regulated | $ | 30,444 | $ | 31,168 | $ | 58,342 | $ | 58,374 | ||||||||
Non – Regulated | 3,087 | 3,882 | 6,012 | 7,982 | ||||||||||||
Inter-segment Elimination | (138 | ) | (131 | ) | (264 | ) | (260 | ) | ||||||||
Consolidated Revenues | $ | 33,393 | $ | 34,919 | $ | 64,090 | $ | 66,096 | ||||||||
Operating Income: | ||||||||||||||||
Regulated | $ | 7,903 | $ | 9,988 | $ | 13,936 | $ | 15,613 | ||||||||
Non – Regulated | 1,047 | 733 | 2,041 | 1,458 | ||||||||||||
Consolidated Operating Income | $ | 8,950 | $ | 10,721 | $ | 15,977 | $ | 17,071 | ||||||||
Net Income: | ||||||||||||||||
Regulated | $ | 7,423 | $ | 8,151 | $ | 13,290 | $ | 12,134 | ||||||||
Non – Regulated | 723 | 524 | 1,406 | 1,035 | ||||||||||||
Consolidated Net Income | $ | 8,146 | $ | 8,675 | $ | 14,696 | $ | 13,169 | ||||||||
Capital Expenditures: | ||||||||||||||||
Regulated | $ | 23,268 | $ | 18,350 | $ | 35,561 | $ | 28,328 | ||||||||
Non – Regulated | 106 | 16 | 137 | 49 | ||||||||||||
Total Capital Expenditures | $ | 23,374 | $ | 18,366 | $ | 35,698 | $ | 28,377 | ||||||||
As of | As of | |||||||
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Assets: | ||||||||
Regulated | $ | 807,021 | $ | 764,749 | ||||
Non – Regulated | 9,093 | 8,994 | ||||||
Inter-segment Elimination | (8,543 | ) | (5,913 | ) | ||||
Consolidated Assets | $ | 807,571 | $ | 767,830 |
Note 6 – Short-term Borrowings
As of June 30, 2018,2019, the Company has establishedretains lines of credit aggregating $92.0$100.0 million. At June 30, 2018,2019, the outstanding borrowings under these credit lines were $39.0$59.4 million at a weighted average interest rate of 3.18%3.41%.
The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were as follows:
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||
Three Months | Six Months | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Average Daily Amounts Outstanding | $ | 31,555 | $ | 15,582 | $ | 29,721 | $ | 14,221 | $ | 50,992 | $ | 31,555 | $ | 50,485 | $ | 29,721 | ||||||||||||||||
Weighted Average Interest Rates | 3.10% | 2.08% | 2.94% | 1.95% | 3.52% | 3.10% | 3.57% | 2.94% |
The maturity dates for the $39.0$59.4 million outstanding as of June 30, 20182019 are in July 20182019 through September 20182019 and are extendable at the discretion of the Company.
11
Interest rates for short-term borrowings under the lines of credit are below the prime rate with no requirement for compensating balances.
Note 7 – Commitments and Contingent Liabilities
Water Supply- Middlesex has an agreement with the New Jersey Water Supply Authority (NJWSA) for the purchase of untreated water through November 30, 2023, which provides for an average purchase of 27.0 million gallons a day (mgd). Pricing is set annually by the NJWSA through a public rate making process. The agreement has provisions for additional pricing in the event Middlesex overdrafts or exceeds certain monthly and annual thresholds.
Middlesex also has an agreement with a non-affiliated regulated water utility for the purchase of treated water. This agreement, which expires February 27, 2021, provides for the minimum purchase of 3.0 mgd of treated water with provisions for additional purchases.
Tidewater contracts with the City of Dover, Delaware to purchase 15.0 million gallons of treated water annually.
Purchased water costs are shown below:
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Treated | $ | 703 | $ | 795 | $ | 1,591 | $ | 1,574 | $ | 827 | $ | 703 | $ | 1,597 | $ | 1,591 | ||||||||||||||||
Untreated | 850 | 573 | 1,780 | 1,232 | 782 | 850 | 1,643 | 1,780 | ||||||||||||||||||||||||
Total Costs | $ | 1,553 | $ | 1,368 | $ | 3,371 | $ | 2,806 | $ | 1,609 | $ | 1,553 | $ | 3,240 | $ | 3,371 |
Guarantees-As part of an agreement with the County of Monmouth, New Jersey (County), Middlesex serves as guarantor of the performance of Applied Water Management, Inc. (AWM), an unaffiliated wastewater treatment contractor, to operate a County-owned leachate pretreatment facility at the Monmouth County Reclamation Center in Tinton Falls, New Jersey. The performance guaranty is effective through 2028 unless another guarantor, acceptable to the County, replaces Middlesex before such date. Under agreements with AWM and Natural Systems Utilities, LLC (NSU), the parent company of AWM, Middlesex earns a fee for providing the performance guaranty. In addition, Middlesex may provide operational support to the facility, as needed, and AWM and NSU, serving as guarantor to Middlesex with respect to the performance of AWM, agree to indemnifyhave indemnified Middlesex against any claims that may arise under the Middlesex guaranty to the County.
11
If requested to perform under the guaranty to the County and, if AWM and NSU, as guarantor to Middlesex, do not fulfill their obligations to indemnify Middlesex against any claims that may arise under the Middlesex guaranty to the County, Middlesex would be required to fulfill the remaining operational commitment of AWM. As of both June 30, 20182019 and December 31, 2017,2018, the liability recognized in Other Non-Current Liabilities on the balance sheet for the guaranty is less than $0.1approximately $1.5 million.
Leases-The Company determines if an arrangement is a lease at inception. Generally, a lease agreement exists if the Company determines that the arrangement gives the Company control over the use of an identified asset and obtains substantially all of the benefits from the identified asset.
The Company has entered into an operating lease of office space for administrative purposes, expiring in 2030. The Company has not entered into any finance leases. The exercise of a lease renewal option for the Company’s administrative offices is solely at the discretion of the Company.
12
The right-of-use (ROU) asset recorded represents the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company’s operating leases. Rental expenses underlease does not provide an implicit discount rate and as such the Company used an estimated incremental borrowing rate (4.03%) based on the information available at commencement date in determining the present value of lease payments.
Given the impacts of accounting for regulated operations, and the resulting recognition of expense at the amounts recovered in customer rates, expenditures for operating leases are consistent with lease expense and were $0.1 million and less than $0.1 million for each ofthe three months ended June 30, 2019 and 2018, respectively and $0.3 million and $0.1 million for the six months ended June 30, 2019 and 2018, respectively.
Information related to operating lease ROU assets and 2017. lease liabilities is as follows:
(In Millions) | ||||
June 30, 2019 | ||||
ROU Asset at Lease Inception | $ | 7.3 | ||
Accumulated Amortization | (1.0 | ) | ||
Current ROU Asset | $ | 6.3 |
The Company’s future minimum operating leases for these facilities will expire in 2028.lease commitments as of June30, 2019 are as follows:
(In Millions) | ||||
June 30, 2019 | ||||
2019 | $ | 0.3 | ||
2020 | 0.8 | |||
2021 | 0.8 | |||
2022 | 0.8 | |||
2023 | 0.8 | |||
Thereafter | 5.3 | |||
Total Lease Payments | $ | 8.8 | ||
Imputed Interest | (2.0 | ) | ||
Present Value of Lease Payments | 6.8 | |||
Less Current Portion* | (0.7 | ) | ||
Non-Current Lease Liability | $ | 6.1 | ||
*Included in Other Current Liabilities |
Construction - The Company has forecasted to spend approximately $78$116 million for its construction program in 2018.2019. The actualCompany has entered into several contractual construction agreements that, in the aggregate, obligate it to expend an estimated $77 million in the future. The timing and amount of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.
Litigation - The Company is a defendant in lawsuits in the normal course of business. We believe the resolution of pending claims and legal proceedings will not have a material adverse effect on the Company’s consolidated financial statements.
Change in Control Agreements - The Company has Change in Control Agreements with certain of its officers that provide compensation and benefits in the event of termination of employment in connection with a change in control of the Company.
13
Note 8 – Employee Benefit Plans
Pension Benefits - The Company’s Pension Plan covers all active employees hired prior to April 1, 2007. For the three months ended June 30, 2018 and 2017, the Company made Pension Plan cash contributions of $0.8 million and $1.0 million, respectively. For the six months ended June 30, 2018 and 2017, the Company made Pension Plan cash contributions of $1.3 million and $1.5 million, respectively. The Company expects to make Pension Plan cash contributions of approximately $2.0 million over the remainder of the current year. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides anfor a potential annual contribution in an amount that is at the discretion of the Company, based upon a percentage of the participants’ eligible compensation.Company. In order to be eligible for a contribution, the participant must be employed by the Company on December 31st of the year to which the contribution relates. For the three months ended June 30, 2019 and 2018, the Company made Pension Plan cash contributions of $0.5 million and $0.8 million, respectively. For the six months ended June 30, 2019 and 2018, the Company made Pension Plan cash contributions of $1.0 million and $1.3 million, respectively. The Company expects to make Pension Plan cash contributions of approximately $2.6 million over the remainder of the current year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.3$0.4 million in annual benefits to the retired participants.
Other Postretirement Benefits-The Company’s retirement plan other than pensions (Other Benefits Plan) covers substantially all of its current retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. For each of the three months ended June 30, 20182019 and 2017,2018, the Company made Other Benefits Plan cash contributions of $0.2 million, respectively. For each of the six months ended June 30, 20182019 and 2017,2018, the Company made Other Benefits Plan cash contributions of $0.4 million and $0.2 million, respectively. The Company expects to make Other Benefits Plan cash contributions of approximately $1.2$1.0 million over the remainder of the current year.
12
The following tables set forth information relating to the Company’s periodic costs for its employee retirement benefit plans:
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Service Cost | $ | 607 | $ | 600 | $ | 284 | $ | 272 | $ | 543 | $ | 607 | $ | 210 | $ | 284 | ||||||||||||||||
Interest Cost | 765 | 786 | 474 | 491 | 857 | 765 | 496 | 474 | ||||||||||||||||||||||||
Expected Return on Assets | (1,218 | ) | (1,122 | ) | (637 | ) | (601 | ) | (1,173 | ) | (1,218 | ) | (613 | ) | (637 | ) | ||||||||||||||||
Amortization of Unrecognized Losses | 415 | 391 | 447 | 445 | 404 | 415 | 330 | 447 | ||||||||||||||||||||||||
Amortization of Unrecognized Prior Service Cost (Credit) | — | — | (402 | ) | (432 | ) | — | — | — | (402 | ) | |||||||||||||||||||||
Net Periodic Benefit Cost* | $ | 569 | $ | 655 | $ | 166 | $ | 175 | $ | 631 | $ | 569 | $ | 423 | $ | 166 |
14
Pension Benefits | Other Benefits | |||||||||||||||
Six Months Ended June 30, | ||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Service Cost | $ | 1,213 | $ | 1,200 | $ | 567 | $ | 544 | ||||||||
Interest Cost | 1,530 | 1,572 | 949 | 982 | ||||||||||||
Expected Return on Assets | (2,435 | ) | (2,245 | ) | (1,275 | ) | (1,203 | ) | ||||||||
Amortization of Unrecognized Losses | 829 | 783 | 894 | 890 | ||||||||||||
Amortization of Unrecognized Prior Service Cost (Credit) | — | — | (803 | ) | (864 | ) | ||||||||||
Net Periodic Benefit Cost* | $ | 1,137 | $ | 1,310 | $ | 332 | $ | 349 | ||||||||
*Service cost is included in Operations and Maintenance expense on Consolidated Statements of Income; all other amounts are included in Other Income/Expense, net. |
(In Thousands) | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
Six Months Ended June 30, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Service Cost | $ | 1,085 | $ | 1,213 | $ | 420 | $ | 567 | ||||||||
Interest Cost | 1,713 | 1,530 | 992 | 949 | ||||||||||||
Expected Return on Assets | (2,347 | ) | (2,435 | ) | (1,226 | ) | (1,275 | ) | ||||||||
Amortization of Unrecognized Losses | 809 | 829 | 660 | 894 | ||||||||||||
Amortization of Unrecognized Prior Service Cost (Credit) | — | — | — | (803 | ) | |||||||||||
Net Periodic Benefit Cost* | $ | 1,260 | $ | 1,137 | $ | 846 | $ | 332 | ||||||||
*Service cost is included in Operations and Maintenance expense on Consolidated Statements of Income; all other amounts are included in Other Income/Expense, net. |
Note 9 – Revenue Recognition from Contracts with Customers
The Company’s revenues are primarily generated from regulated tariff-based sales of water and wastewater services and non-regulated operation and maintenance contracts for services on water and wastewater systems owned by others. Revenue from contracts with customers is recognized when control of a promised good or service is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.
The Company’s regulated revenue from contracts with customers is derived from tariff-based sales that result from the obligation to provide water and wastewater services to residential, industrial, commercial, fire-protection and wholesale customers. The Company’s residential customers are billed quarterly while most of the Company’s industrial, commercial, fire-protection and wholesale customers are billed monthly. Payments by customers are due between 15 toand 30 days after the invoice date. The Company recognizes revenue as the water and wastewater services are delivered to customers as well asand records unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing factors such as historical customer data, regional weather indicators and general economic conditions in its service territories. Unearned Revenues and Advance Service Fees include fixed service charge billings in advance of service provided to Tidewater customers thatand are recognized as service is provided to the customer.provided.
13
Non-regulated service contract revenues consist of base service fees, as well as fees for additional billable services provided to customers, are billed monthly and are due within 30 days after the invoice date. The Company considers the amounts billed to represent the value of these services provided to customers. TheseCertain of these contracts expire between December 2018 andcontinue through 2022 and thus contain remaining performance obligations for which the Company expects to recognize revenue in the future. These contracts also contain customary termination provisions.
AlmostSubstantially all of the amounts included in operating revenues and accounts receivable are from contracts with customers. The Company records itsan allowance for doubtful accounts based on historical write-offs combined with an evaluation of current economic conditions within its service territories.
The Company’s contracts do not contain any significant financing components.
15
The Company’s operating revenues are comprised of the following:
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Regulated Tariff Sales | ||||||||||||||||||||||||||||||||
Residential | $ | 17,892 | $ | 17,024 | $ | 33,515 | $ | 32,183 | $ | 17,780 | $ | 17,892 | $ | 33,760 | $ | 33,515 | ||||||||||||||||
Commercial | 3,771 | 3,493 | 6,880 | 6,447 | 3,744 | 3,771 | 7,053 | 6,880 | ||||||||||||||||||||||||
Industrial | 2,689 | 2,395 | 5,001 | 4,578 | 2,321 | 2,689 | 4,519 | 5,001 | ||||||||||||||||||||||||
Fire Protection | 3,073 | 2,911 | 5,961 | 5,824 | 3,098 | 3,073 | 6,111 | 5,961 | ||||||||||||||||||||||||
Wholesale | 3,680 | 3,397 | 6,892 | 6,631 | 3,429 | 3,680 | 6,768 | 6,892 | ||||||||||||||||||||||||
Non-Regulated Contract Operations | 3,781 | 3,762 | 7,780 | 7,411 | 2,986 | 3,781 | 5,810 | 7,780 | ||||||||||||||||||||||||
Total Revenue from Contracts with Customers | $ | 34,886 | $ | 32,982 | $ | 66,029 | $ | 63,074 | $ | 33,358 | $ | 34,886 | $ | 64,021 | $ | 66,029 | ||||||||||||||||
Other Regulated Revenues | 63 | 48 | 125 | 98 | 73 | 63 | 131 | 125 | ||||||||||||||||||||||||
Other Non-Regulated Revenues | 101 | 111 | 202 | 212 | 100 | 101 | 202 | 202 | ||||||||||||||||||||||||
Inter-segment Elimination | (131 | ) | (127 | ) | (260 | ) | (239 | ) | (138 | ) | (131 | ) | (264 | ) | (260 | ) | ||||||||||||||||
Total Revenue | $ | 34,919 | $ | 33,014 | $ | 66,096 | $ | 63,145 | $ | 33,393 | $ | 34,919 | $ | 64,090 | $ | 66,096 |
Note 10 – Income Taxes
As part of its 2014 Federal income tax return, the Company adopted the final IRSInternal Revenue Service (IRS) tangible property regulations and changed its accounting method for the tax treatment of expenditures that qualified as deductible repairs. The adoption resulted in a net reduction of $17.6 million in taxes previously remitted to the IRS, for which the Company has already sought and received the tax refunds. While the Company believes that its treatment of qualifying tangible property repair costs is proper, aA reserve provision against refunded taxes of $2.3 million was recorded in 2015 at the time of filing its change in accounting method. This wasmethod based on a possible challenge by the IRS during an audit examination. The Company’s 2014 federal income tax return was subsequently selected for examination by the IRS in 2016. During the second quarter ofIRS. In 2018, the Company received information from the IRS regarding certain aspects of theincreased its adopted accounting method used to calculate qualifying tangible property repair cost deductions and has determined that it should increase itsincome tax reserve provision to $3.7$4.1 million. AsDuring the first quarter of 2019, the Company agreed to certain modifications of its accounting method for expenditures that qualify as deductible repairs and the IRS examination continuesconcluded its audit of the Company’s 2014 federal income tax return. The modifications also impacted the Company’s filed 2015, 2016 and 2017 federal income tax returns. In 2019, the Company paid $0.8 million in income taxes and $0.1 million in interest in connection with the conclusion and closing of the 2014 and 2015 tax return audits and reduced its income tax reserve provision and interest expense liability to $3.1 million and $0.2 million, respectively. The IRS is currently examining the 2016 and 2017 tax returns to determine the impact of the modifications on those filings and pending its completion of those examinations, the final tax liability could be different than the recorded reserve provision. For the three and six months ended June 30, 2018, the Company has recorded $0.4 million in interest expense due to this reserve provision.
1416
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.
Forward-Looking Statements
Certain statements contained in this periodic report and in the documents incorporated by reference constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The Company intends that these statements be covered by the safe harbors created under those laws. They include, but are not limited to statements as to:
- | expected financial condition, performance, prospects and earnings of the Company; |
- | strategic plans for growth; |
- | the amount and timing of rate increases and other regulatory matters, including the recovery of certain costs recorded as regulatory assets; |
- | the Company’s expected liquidity needs during the upcoming fiscal year and beyond and the sources and availability of funds to meet its liquidity needs; |
- | expected customer rates, consumption volumes, service fees, revenues, margins, expenses and operating results; |
- | financial projections; |
- | the expected amount of cash contributions to fund the Company’s retirement benefit plans, anticipated discount rates and rates of return on retirement benefit plan assets; |
- | the ability of the Company to pay dividends; |
- | the Company’s compliance with environmental laws and regulations and estimations of the materiality of any related costs; |
- | the safety and reliability of the Company’s equipment, facilities and operations; |
- | trends; and |
- | the availability and quality of our water supply. |
These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from anticipated results and outcomes include, but are not limited to:
- | effects of general economic conditions; |
- | competition for growth in non-franchised markets to be potentially served by the Company; |
- | ability of the Company to adequately control selected operating expenses which are necessary to maintain safe and proper utility services, and which may be beyond the Company’s control; |
- | availability of adequate supplies of water; |
- | ability to maintain compliance with all regulatory requirements with respect to water and wastewater treatment, distribution and collection; |
- | actions taken by government regulators, including decisions on rate increase requests; |
- | ability to meet new or modified water and wastewater quality standards; |
- | weather variations and other natural phenomena impacting utility operations; |
- | financial and operating risks associated with acquisitions and/or privatizations; |
- | acts of war or terrorism; |
- | changes in the pace of residential housing development; |
- | actions against the company that could be brought by third parties; |
- | availability and cost of capital resources; and |
- | other factors discussed elsewhere in this quarterly report. |
Many of these factors are beyond the Company’s ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which only speak to the Company’s understanding as of the date of this report. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or, to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.
1517
For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.
Overview
Middlesex Water Company (Middlesex or the Company)(Middlesex) has operated as a water utility in New Jersey since 1897, in Delaware through our wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater), since 1992 and in Pennsylvania through our wholly-owned subsidiary, Twin Lakes Utilities, Inc. (Twin Lakes), since 2009. We are in the business of collecting, treating and distributing water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate two New Jersey municipal water and wastewater systems under contract and provide regulated wastewater services in New Jersey and Delaware through four of our other subsidiaries. We are regulated as to rates charged to customers for water and wastewater services, as to the quality of water service we provide and as to certain other matters in New Jersey, Delaware and Pennsylvania. Only our Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy), Inc. (USA-PA) and White Marsh Environmental Services, Inc. (White Marsh) subsidiaries are not regulated utilities.
Our New Jersey water utility system (the Middlesex System) provides water services to approximately 61,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to municipalities in central New Jersey with a total population of approximately 219,000. In partnership with our subsidiary, USA-PA, we operate the water supply system and wastewater system for the City of Perth Amboy, New Jersey (Perth Amboy). Our Bayview systemsubsidiary provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), provide water and wastewater services to approximately 2,500 customers in Southampton Township, New Jersey.
USA operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system under a ten-year operations and maintenance contract expiring in 2022. USA also provides unregulated water and wastewater services under contract with several New Jersey municipalities. Under a marketing agreement with HomeServe USA (HomeServe), our New Jersey and Delaware residential customers are offered a menu of water and wastewater related home maintenance service program contracts. HomeServe is a leading national provider of such home maintenance service programs. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. The agreement expires in 2021.
Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC (Southern Shores), provide water services to approximately 45,00047,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services approximately 4,000 customers in Delaware and Maryland through various operations and maintenance contracts.
Our Tidewater Environmental Services, Inc. (TESI) subsidiary provides wastewater services to approximately 3,5003,600 residential retail customers in Sussex Counties, Delaware.
USA-PA operates the water and wastewater systems for the City of Perth Amboy, New Jersey (Perth Amboy) under a 10-year operations and maintenance contract expiring in 2028. In addition to performing day-to day operations, USA-PA is also responsible for emergency responses and management of capital projects funded by Perth Amboy. USA-PA does not manage the billing, collections and customer service functions of Perth Amboy.
USA operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system under a ten-year operations and maintenance contract expiring in 2022. In addition to performing day to day operations, USA is responsible for billing, collections, customer service, emergency responses and management of capital projects funded by Avalon.
Under a marketing agreement with HomeServe USA (HomeServe), USA offers residential customers in New Jersey and Delaware a menu of water and wastewater related home maintenance programs. HomeServe is a leading national provider of such home maintenance service programs. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. USA also provides unregulated water and wastewater services under contract with several New Jersey municipalities.
18
Our Pennsylvania subsidiary, Twin Lakes, provides water services to approximately 120 retail customers in the Township of Shohola, Pike County, Pennsylvania.
The majority of our revenue is generated from retail and contract water services to customers in our franchised and contracted service areas. We record water service revenue as such service is rendered and include estimates for amounts unbilled at the end of each month for services provided after the last billing cycle to the end of the month. Fixed service charges are billed in advance by our subsidiary, Tidewater, and are recognized in revenue as the service is provided.
16
Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management, and customer growth. These factors are evident in the discussions below which compare our results of operations with the prior period.
Recent Developments
Capital Construction Program -The Company’s multi-year capital construction program encompasses numerous projects designed to upgrade and replace utility infrastructure as well as enhance the integrity and reliability of assets to better serve the current and future generations of water and wastewater customers. The Company plans to invest approximately $78$116 million in 20182019 in connection with this plan for projects that include, but are not limited to:to;
· | Construction of a 4.6 mile water transmission pipeline to provide critical resiliency and redundancy to the Company’s water transmission system in New Jersey; |
· | Replacement of |
· | Enhanced treatment process at the Company’s largest water |
· | Relocation of water meters from inside customers’ premises to exterior meter pits to allow quicker access by crews in emergencies, enhanced customer safety and convenience and reduced unmetered water; and |
· | Additional standby emergency power generation. |
Middlesex Base WaterPinelands Files for Rate Increase ApprovedIncreases -- In March 2018, Middlesex’s petition to2019, Pinelands Water and Pinelands Wastewater filed separate petitions with the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase base water rates was concluded based on a negotiated settlement which resulted in an increase in annual operating revenues of $5.5 million. The new base water rates became effective April 1, 2018 and are designed to recover increased operating costs as well as a return on invested capital in rate base of $245.5by approximately $0.2 million and reflect an authorized return on equity$0.5 million per year, respectively. These requests were necessitated by capital infrastructure investments both companies have made, or have committed to make, and increased operations and maintenance costs. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of 9.6%. Part of Middlesex’s filing also included a request for regulatory accounting treatment for $28.7 million of accumulated deferred tax benefits associated with required adoption of tangible property regulations issuedthe requests. A decision by the Internal Revenue Service. The settlement agreement allowed for a four-year amortization period forNJBPU in either matter is not expected before the deferred tax benefits as well as immediate and prospective recognitionfourth quarter of the tangible property regulations tax benefits in future years, which is expected to lower the Company’s income tax expense and, consequently, its effective income tax rate.2019.
Contract OperationsMiddlesex Receives Financing Approval -USA-PA operates Perth Amboy’s waterIn May 2019, the NJBPU approved Middlesex’s petition with the NJBPU seeking approval to issue and wastewater collection systems under contract, which expires on December 31, 2018. In July 2018, through a competitive proposal process, USA-PA was awarded a $67 million base professional services contractsell up to continue to operate the water and wastewater systems1,500,000 shares of its common stock in one or more transactions through December 31, 2028.2022. Sales of additional shares of common stock are part of the Company’s comprehensive financing plan to fund its multi-year utility plant infrastructure investment plan.
Twin Lakes Files for Rate Increase -In July 2019, Twin Lakes filed a petition with the Pennsylvania Public Utilities Commission (PAPUC) seeking permission to increase base rates by approximately $0.2 million per year. This request was necessitated by capital infrastructure investments Twin Lakes has made, or has committed to make, and increased operations and maintenance costs. We cannot predict whether the PAPUC will ultimately approve, deny, or reduce the amount of the request. A decision by the PAPUC is not expected before the first quarter of 2020.
Outlook
Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management and customer growth (which are evident in comparison discussions in the Results of Operations section below). Revenues in the first quarter of 2019 were favorably impacted by Middlesex’s April 2018 base water rate increase. Weather patterns experienced in 2017 and 2018, which resulted in lower customer demand for water, continue to occur in 2019 and have impacted revenues and net income. Actuarially-determined non-service retirement benefit plan costs are expected to increase in 2019. We continue to implement plans to further streamline operations and further reduce, and mitigate increases in, operating costs. Changes in customer water usage habits, as well as increases in capital expenditures and operating costs, are significant factors in determining the timing and extent of rate increase requests. As operating costs are anticipated to increase in 2018 in a variety of categories, we continue to implement plans to further streamline operations and further reduce, and mitigate increases in, operating costs.
1719
Organic residential customer growth for 2018 is expected to bethrough June 2019 has been consistent with that experienced in recent years.
Our strategy for profitable growth is focused on fivethe following key areas:
· |
Prudent acquisitions of |
· |
· | Operation of municipal and industrial |
· | Invest in |
Operating Results by Segment
The discussion of the Company’s operating results is on a consolidated basis and includes significant factors by subsidiary. The Company has two operating segments, Regulated and Non-Regulated. The operations of the Regulated segment are subject to regulations promulgated by state public utility commissions as to rates and level of service. Rates and level service in the Non-Regulated segment are subject to the terms of individually-negotiated and executed contracts with municipal, industrial and other clients. Both segments are subject to federal and state environmental, water and wastewater quality and other associated legal and regulatory requirements.
The segments in the tables included below consist of the following companies: Regulated-Middlesex, Tidewater, Pinelands, Southern Shores, TESI and Twin Lakes; Non-Regulated-USA, USA-PA, and White Marsh.
Results of Operations – Three Months Ended June 30, 20182019
(In Thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Regulated | Non- Regulated | Total | Regulated | Non- Regulated | Total | Regulated | Non- Regulated | Total | Regulated | Non- Regulated | Total | |||||||||||||||||||||||||||||||||||||
Revenues | $ | 31,138 | $ | 3,781 | $ | 34,919 | $ | 29,252 | $ | 3,762 | $ | 33,014 | $ | 30,406 | $ | 2,987 | $ | 33,393 | $ | 31,138 | $ | 3,781 | $ | 34,919 | ||||||||||||||||||||||||
Operations and maintenance expenses | 13,918 | 2,907 | 16,825 | 13,914 | 2,942 | 16,856 | 14,957 | 1,824 | 16,781 | 13,918 | 2,907 | 16,825 | ||||||||||||||||||||||||||||||||||||
Depreciation expense | 3,690 | 46 | 3,736 | 3,337 | 48 | 3,385 | 4,061 | 62 | 4,123 | 3,690 | 46 | 3,736 | ||||||||||||||||||||||||||||||||||||
Other taxes | 3,542 | 95 | 3,637 | 3,329 | 86 | 3,415 | 3,485 | 54 | 3,539 | 3,542 | 95 | 3,637 | ||||||||||||||||||||||||||||||||||||
Operating income | 9,988 | 733 | 10,721 | 8,672 | 686 | 9,358 | 7,903 | 1,047 | 8,950 | 9,988 | 733 | 10,721 | ||||||||||||||||||||||||||||||||||||
Other income, net | 764 | 21 | 785 | 380 | 30 | 410 | 558 | 5 | 563 | 764 | 21 | 785 | ||||||||||||||||||||||||||||||||||||
Interest expense | 2,068 | — | 2,068 | 1,469 | — | 1,469 | 1,788 | — | 1,788 | 2,068 | — | 2,068 | ||||||||||||||||||||||||||||||||||||
Income taxes | 533 | 230 | 763 | 2,611 | 307 | 2,918 | (750 | ) | 329 | (421 | ) | 533 | 230 | 763 | ||||||||||||||||||||||||||||||||||
Net income | $ | 8,151 | $ | 524 | $ | 8,675 | $ | 4,972 | $ | 409 | $ | 5,381 | $ | 7,423 | $ | 723 | $ | 8,146 | $ | 8,151 | $ | 524 | $ | 8,675 |
1820
Operating Revenues
Operating revenues for the three months ended June 30, 2018 increased $1.92019 decreased $1.5 million from the same period in 2017.2018. This increasedecrease was related to the following factors:
· | Middlesex System revenues |
o | Unfavorable weather reduced water demand from our general meter service and wholesale contract customers, resulting in lower revenues of $0.8 million and $0.2 million, respectively; and |
o | All other revenue categories increased $0.1 million; |
· | Tidewater System revenues increased |
· | Non-regulated revenues decreased by $0.8 million primarily due to changes resulting from USA-PA’s new 10 year contract with Perth Amboy. Under the new contract effective January 1, 2019, USA-PA has direct management control for wastewater services, for which USA-PA is compensated. Under the prior contract, USA-PA utilized, and was compensated for, a sub-contractor. This results in a corresponding decrease in operations and maintenance expense; and |
· | All other revenue categories increased $0.1 million. |
Operation and Maintenance Expense
Operation and maintenance expenses for the three months ended June 30, 2018 were slightly below2019 remained consistent with the same period in 2017.2018, primarily related to the following factors:
· | Non-regulated operation and maintenance expenses decreased $1.1 million, primarily due to our new Perth Amboy operating contract, effective January 1, 2019, under which USA-PA no longer incurs sub-contractor fees for wastewater services. This results in a corresponding decrease in operating revenues; |
· | Labor costs in our regulated subsidiaries increased $0.4 million due to increased headcount and increased average labor rates; |
· | Rent costs increased $0.1 million due to the January 2019 commencement of our lease of new corporate administrative office space; |
· | Health insurance costs increased $0.1 million due to increased premiums and headcount; |
· | Increased costs of $0.1 million for water main break activity in our Middlesex System in the second quarter of 2019 as compared to the second quarter of 2018; and |
· | All other operation and maintenance expense categories increased $0.4 million. |
Depreciation
Depreciation expense for the three months ended June 30, 20182019 increased $0.4 million from the same period in 20172018 due to a higher level of utility plant in service.
Other Taxes
Other taxes for the three months ended June 30, 2018 increased $0.22019 decreased $0.1 million from the same period in 20172018 primarily due to higherlower revenue related taxes on increasedlower revenues in our Middlesex system.
Other Income, net
Other Income, net for the three months ended June 30, 2018 increased $0.42019 decreased $0.2 million from the same period in 20172018, primarily due tohigher actuarially-determined postretirement benefit plan non-service expense and the sale of wastewater franchise rights by our TESI subsidiary.subsidiary in the second quarter of 2018. This decrease was partially offset by higher Allowance for Funds Used During Construction resulting from a higher level of capital construction projects in progress.
21
Interest Charges
Interest charges for the three months ended June 30, 2018 increased $0.62019 decreased $0.3 million from the same period in 20172018 due to accruedlower interest associated with the IRS examinationrelated to Internal Revenue Service (IRS) examinations of the Company’s 2014 federal income tax return (seeNote 10 – Income Taxes for further discussion of this matter), higher average amounts of long-term debt outstanding andreturns. This decrease was partially offset by higher average short-term debt outstanding at increased interest rates in 20182019 as compared to 2017.2018.
Income Taxes
Income taxes for the three months ended June 30, 20182019 decreased $2.2$1.2 million from the same period in 2017,2018, primarily due to the regulatory accounting treatment of tax benefits associated with the adoption of tangible property regulations tax deductions,prescribed by the IRS, which was approved in Middlesex’s most recent2018 base rate case (see “decision, and lower-pre-tax incomeMiddlesex Base Water Rate Increase Approved”. In addition, Tidewater’s effective income tax rate was decreased in Recent Developments for further discussion of this matter) and aMarch 2019, reflecting the rate reduction approved by the DEPSCto reflect the lower effectivecorporate income tax rate resulting from implementation of theTax Cuts and Jobs Act of 2017, partially offset by higher pre-tax incomeAct. This has resulted in a corresponding decrease in operating revenues.
Net Income and Earnings Per Share
Net income for the three months ended June 30, 2018 increased $3.32019 decreased $0.5 million as compared with the same period in 2017.2018. Basic earnings per share were $0.53$0.49 and $0.33$0.53 for the three months ended June 30, 20182019 and 2017,2018, respectively. Diluted earnings per share were $0.52$0.49 and $0.33$0.52 for the three months ended June 30, 2019 and 2018, and 2017, respectively.
19
Results of Operations – Six Months Ended June 30, 20182019
(In Thousands) | ||||||||||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Regulated | Non- Regulated | Total | Regulated | Non- Regulated | Total | |||||||||||||||||||
Revenues | $ | 58,280 | $ | 5,810 | $ | 64,090 | $ | 58,316 | $ | 7,780 | $ | 66,096 | ||||||||||||
Operations and maintenance expenses | 29,374 | 3,527 | 32,901 | 28,626 | 6,033 | 34,659 | ||||||||||||||||||
Depreciation expense | 8,047 | 123 | 8,170 | 7,254 | 91 | 7,345 | ||||||||||||||||||
Other taxes | 6,923 | 119 | 7,042 | 6,823 | 198 | 7,021 | ||||||||||||||||||
Operating income | 13,936 | 2,041 | 15,977 | 15,613 | 1,458 | 17,071 | ||||||||||||||||||
Other income, net | 1,010 | 10 | 1,020 | 1,213 | 36 | 1,249 | ||||||||||||||||||
Interest expense | 2,988 | — | 2,988 | 3,206 | — | 3,206 | ||||||||||||||||||
Income taxes | (1,332 | ) | 645 | (687 | ) | 1,486 | 459 | 1,945 | ||||||||||||||||
Net income | $ | 13,290 | $ | 1,406 | $ | 14,696 | $ | 12,134 | $ | 1,035 | $ | 13,169 |
(In Thousands) | ||||||||||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
Regulated | Non- Regulated | Total | Regulated | Non- Regulated | Total | |||||||||||||||||||
Revenues | $ | 58,316 | $ | 7,780 | $ | 66,096 | $ | 55,734 | $ | 7,411 | $ | 63,145 | ||||||||||||
Operations and maintenance expenses | 28,626 | 6,033 | 34,659 | 26,906 | 5,889 | 32,795 | ||||||||||||||||||
Depreciation expense | 7,254 | 91 | 7,345 | 6,596 | 97 | 6,693 | ||||||||||||||||||
Other taxes | 6,823 | 198 | 7,021 | 6,545 | 179 | 6,724 | ||||||||||||||||||
Operating income | 15,613 | 1,458 | 17,071 | 15,687 | 1,246 | 16,933 | ||||||||||||||||||
Other income, net | 1,213 | 36 | 1,249 | 705 | 30 | 735 | ||||||||||||||||||
Interest expense | 3,206 | — | 3,206 | 2,472 | — | 2,472 | ||||||||||||||||||
Income taxes | 1,486 | 459 | 1,945 | 4,809 | 565 | 5,374 | ||||||||||||||||||
Net income | $ | 12,134 | $ | 1,035 | $ | 13,169 | $ | 9,111 | $ | 711 | $ | 9,822 |
Operating Revenues
Operating revenues for the six months ended June 30, 2018 increased $3.02019 decreased $2.0 million from the same period in 2017.2018. This increasedecrease was related to the following factors:
· | Middlesex System revenues |
o | Unfavorable weather reduced water demand from our general meter service and wholesale contract customers, resulting in reduced revenues of $1.1 million and $0.2 million, respectively; and; |
22
o | Effective April 1, 2018, a NJBPU-approved base rate increase resulted in higher revenues of |
· | Tidewater System revenues |
· |
Operation and Maintenance Expense
Operation and maintenance expenses for the six months ended June 30, 2018 increased $1.92019 decreased $1.8 million from the same period in 2017,2018, primarily related to the following factors:
· | Operation and maintenance expenses in our non-regulated subsidiaries decreased $2.5 million, primarily due to our new Perth Amboy operating contract, effective January 1, 2019, under which USA-PA no longer incurs sub-contractor fees for wastewater services. This results in a corresponding decrease in operating revenues; |
· | Variable production costs |
· | Labor costs in our regulated subsidiaries increased |
· | Rent costs increased $0.2 million due to the January 2019 commencement of our lease of new corporate administrative office space; |
· | Health insurance costs increased $0.2 million due to increased premiums and headcount; and |
· |
Depreciation
Depreciation expense for the six months ended June 30, 20182019 increased $0.7$0.8 million from the same period in 20172018 due to a higher level of utility plant in service.
Other Taxes
Other taxes for the six months ended June 30, 2018 increased $0.3 million from2019 remained consistent with the same period in 20172018 primarily due to higherlower revenue related taxes on increasedlower revenues in our Middlesex system.system offset by higher payroll taxes.
20
Other Income, net
Other Income, net for the six months ended June 30, 2018 increased $0.52019 decreased $0.2 million from the same period in 20172018, primarily due tohigher actuarially-determined postretirement benefit plan non-service expense and the sale of wastewater franchise rights by our TESI subsidiary in the second quarter of 2018. This decrease was partially offset by higher Allowance for Funds Used During Construction resulting from a higher level of capital construction projects in progress and the sale of wastewater franchise rights at our TESI subsidiary.progress.
Interest Charges
Interest charges for the six months ended June 30, 2018 increased $0.72019 decreased $0.2 million from the same period in 20172018 due to accruedlower interest associated with the IRS examinationexaminations of the Company’s 2014 federal income tax return (seeNote 10 – Income Taxes for further discussion of this matter),returns. This decrease was partially offset by higher average amounts of long-term debt outstanding and average short-term debt outstanding at increased interest rates in 20182019 as compared to 2017.2018.
23
Income Taxes
Income taxes for the six months ended June 30, 20182019 decreased $3.4$2.6 million from the same period in 2017,2018, primarily due to the regulatory accounting treatment of tax benefits associated with the adoption of the tangible property regulations, tax deductions,prescribed by the IRS, which werewas approved in Middlesex’s most recent2018 base rate case (see “Middlesex Base Water Rate Increase Approved”decision, and lower pre-tax income. In addition, Tidewater’s effective income tax rate was decreased in Recent Developments for further discussion of this matter) and aMarch 2019, reflecting the rate reduction approved by the DEPSCto reflect the lower effectivecorporate income tax rate resulting from implementation of theTax Cuts and Jobs Act of 2017, partially offset by higher pre-tax incomeAct. This has resulted in a corresponding decrease in operating revenues.
Net Income and Earnings Per Share
Net income for the six months ended June 30, 20182019 increased $3.3$1.5 million as compared with the same period in 2017.2018. Basic earnings per share were $0.80$0.89 and $0.60$0.80 for the six months ended June 30, 20182019 and 2017,2018, respectively. Diluted earnings per share were $0.80$0.88 and $0.59$0.80 for the six months ended June 30, 20182019 and 2017,2018, respectively.
Liquidity and Capital Resources
Operating Cash Flows
Cash flows from operations are largely based on four factors: weather, adequate and timely rate increases, effective cost management and growth. The effect of those factors on net income is discussed in “Results of Operations.”
For the six months ended June 30, 2018,2019, cash flows from operating activities decreased $0.9$7.6 million to $19.2 million.$11.6 million from the same period in 2018. The decrease in cash flows from operating activities primarily resulted from higher vendorthe timing of payments to vendors and increased income tax payments. The $19.2 million of net cash flow from operations enabled us to fund approximately 43% of utilityUtility plant expenditures internally for the period.period were primarily funded by financing activities.
Investing Cash Flows
For the six months ended June 30, 2018,2019, cash flows used in investing activities increased $7.2$7.3 million to $28.4 million.$35.7 million from the same period in 2018. The increase in cash flows used in investing activities resulted from increased utility plant expenditures.
For further discussion on the Company’s future capital expenditures and expected funding sources, see “Capital Expenditures and Commitments” below.
21
Financing Cash Flows
For the six months ended June 30, 2018,2019, cash flows from financing activities increased $14.0 million to $22.6 million from the same period in 2018. The majority of the increase in cash flows provided by $7.8 millionfinancing activities is due primarily to increasesthe net increase in short-term and long-term debt funding.funding and increased proceeds from the issuance of common stock under the Middlesex Water Company Investment Plan (the Investment Plan).
Capital Expenditures and Commitments
To fund our capital program, we may use internally generated funds, short-term and long-term debt borrowings, proceeds from sales of common stock under the Middlesex Water Company Investment Plan (the Investment Plan) and proceeds from salesnew offerings to the public of our common stock. See below for a more detailed discussion regarding the funding of our capital program.
The capital investment program for 20182019 is currently estimated to be approximately $78$116 million. Through June 30, 2018,2019, we have expended $28$36 million and expect to incur approximately $50$80 million for capital projects for the remainder of 2018.2019.
24
We currently project that we may expend approximately $190$204 million for capital projects in 20192020 and 2020.2021. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.
To pay for our capital program for the remainder of 20182019, we plan on utilizing:
· | Internally generated funds; |
· | Proceeds from the Investment |
· | Proceeds from the New Jersey and Delaware State Revolving Fund (SRF) |
· | Proceeds from the issuance and sale of First Mortgage Bonds through the New Jersey Economic Development Authority (see discussion under “Long-term Debt” inNote 3 - Capitalization); |
· | If necessary, proceeds from a common stock offering (see discussion under “Common Stock Offering” inRecent Developments above); and |
· | Short-term borrowings |
Recent Accounting Pronouncements – See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.pronouncements and guidance.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
We are exposed to market risk associated with changes in interest rates and commodity prices. The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company’s interest rate risk related to existing fixed rate, long-term debt is not material due to the term of the majority of our First Mortgage Bonds, which have final maturity dates ranging from 20182019 to 2047. Over the next twelve months, approximately $7.2$7.4 million of the current portion of existing long-term debt instruments will mature. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings.
Our risks associated with commodity price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the ability to recover price increases through rates. Non-performance by these commodity suppliers could have a material adverse impact on our results of operations, financial position and cash flows.
We are exposed to credit risk for both our Regulated and Non-Regulated business segments. Our Regulated operations serve residential, commercial, industrial and municipal customers while our Non-Regulated operations engage in business activities with developers, government entities and other customers. Our primary credit risk is exposure to customer default on contractual obligations and the associated loss that may be incurred due to the non-payment of customer accounts receivable balances. Our credit risk is managed through established credit and collection policies which are in compliance with applicable regulatory requirements and involve monitoring of customer exposure and the use of credit risk mitigation measures such as letters of credit or prepayment arrangements. Our credit portfolio is diversified with no significant customer or industry concentrations. In addition, our Regulated businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts receivable expenses and collection costs through rates.
22
The Company's retirement benefit plan assets are exposed to fluctuating market prices of debt and equity securities. Changes to the Company's retirement benefit plan asset values can impact the Company's retirement benefit plan expense, funded status and future minimum funding requirements. Our risk is mitigated by our ability to recover retirement benefit plan costs through rates for regulated utility services charged to our customers.
25
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities and Exchange Act of 1934 (the Exchange Act), an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted by the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosure.
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
23
Item 5. | Other Information |
None.
26
31.2 | Section 302 Certification by A. Bruce O’Connor pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
32.1 | Section 906 Certification by Dennis W. Doll pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.2 | Section 906 Certification by A. Bruce O’Connor pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Schema Document |
101.CAL | XBRL Calculation Linkbase Document |
101.LAB | XBRL Labels Linkbase Document |
101.PRE | XBRL Presentation Linkbase Document |
101.DEF | XBRL Definition Linkbase Document |
2427
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MIDDLESEX WATER COMPANY | |||
By: | /s/A. Bruce O’Connor | ||
A. Bruce O’Connor | |||
Senior Vice President, Treasurer and | |||
Chief Financial Officer | |||
Date: August 2, 2018July 31, 2019